Types of Asset Classes

Making the right decision for you. There are potential risks associated with each asset class but with careful asset allocation, suited to your needs, you can tailor a mix of different levels of return, liquidity and volatility into your portfolio.

Be aware that last year's best performing asset class can easily become next year's worst or vice versa. At Advance, we focus on long-tern performance through disciplined asset allocation and manager selection. Understand more about the perils of market timing.

Asset sector

Benefits

Risks

Cash

Cash investments are held in cash securities such as term deposits and bank bills, which can be up to one year in duration. Investing in cash provides a high level of security and the lowest level of risk. It can be used by the more conservative investor or those with shorter investment timeframes.

Cash can produce the most stable investment returns when compared to other asset sectors, but there is limited scope to generate higher long-term returns relative to growth assets.

There is also a risk that cash returns will not keep pace with inflation.

Currency

Currency Management provides the ability to capture the mis-pricing of global exchange rates. Opportunities exist where currencies diverge from their fundamental values and/or investor sentiment creates a medium?term trend in favour of one currency over another.

A fund’s investments may be held in currencies other than the Australian dollar. Changes in these currencies relative to the Australian dollar and other currencies held within a fund will have an impact on the value of that fund.

Mortgages

A mortgage investment involves lending money to a borrower who then generally uses this money to invest in property. The benefit of investing in mortgage funds is that they typically pay higher returns than cash funds.

Mortgage funds generate stable income from a range of mortgages that often include commercial, industrial, retail and residential property.

Mortgage funds commonly invest into a variety of mortgages which can be illiquid (i.e. this investment cannot easily be converted into cash without delay).

There is also a risk of capital loss in the case where a mortgagor defaults (i.e. the borrower could no longer service the loan). In extreme circumstances mortgage funds may have to suspend repayment of capital to preserve the value of fund assets, delaying the payment of redemption proceeds.

Australian fixed interest

Fixed interest securities provide a regular income stream. There is the potential for capital growth on the original capital invested in periods of declining interest rates. They provide a relatively secure investment, which is generally not as volatile as sharemarket investments.

It can be used by the more conservative investor or those with shorter investment timeframes.

Fixed interest securities can generate a rise in capital value, or a loss, if interest rates fluctuate during their term. In general, a rise in interest rates causes the value of an existing security to fall, while a fall in interest rates causes the value of an existing security to rise.

An investment in fixed interest securities also carries the risk that the issuer may default. Highly rated government bonds, which are unlikely to default, pay a lower rate of return than the relatively more risky corporate bonds, which pay a higher rate of return.

International fixed interest

International fixed interest securities provide wider access to government and corporate bonds from different countries and regions. This can provide opportunities to access higher interest rates than those offered domestically.

In addition to the risks of fixed interest securities outlined above, international fixed interest securities can be affected by:
social, economic, or political factors affecting a country or region,
differing tax structures,
currency movements,
foreign central bank policy,

foreign regulatory requirements.

Listed property securities

Listed property securities involve buying units in listed property trusts that are bought and sold on the stock exchange. It is a simple way to invest in the property market without tying up a large proportion of your money directly in real estate.
Investors can participate in all sectors of the property market including office, hotels, retail, residential and industrial property. Because investment is through the sharemarket, investors can sell securities relatively easily if necessary (unlike direct property investments).

Investing in global property securities gives investors the opportunity to benefit from the performance of global property across several countries, including the US, Australia (where they are more commonly known as LPTs), Netherlands, Belgium, France, UK, Germany and throughout Asia including Japan, Singapore and most recently, Hong Kong. This diversification is increasingly important as the domestic market consolidates.

Returns from listed property securities may include income from rent depending on the type of property owned by the trust and may include a capital growth component through an increase in the value of the property. Like shares, units in property securities can rise and/or fall in value.
Returns from property securities are also affected by fluctuations in the supply and demand for properties and consequential changes in rental levels.
Increasing interest rates can decrease the value of property securities and vice versa. In addition to the risks already noted relating to property securities, global property securities can be affected by:
social, economic or political factors affecting a country or region,
differing tax structures in foreign tax jurisdictions,

foreign regulatory requirements.

Australian shares

Shares represent part ownership of a company and are generally bought and sold on a stock exchange. Returns from shares can include both capital growth and an income component from dividends paid by the company. Imputation credits attached to some dividend payments may offset other taxes payable.

Investing in Australian shares gives investors the opportunity to benefit from the performance of Australian businesses across a wide range of industries such as banking, health care and information technology.

Shares are generally classified as more volatile than other asset sectors because their value tends to fluctuate over the short term. However, over the longer term, they have tended to perform better than other asset sectors.

The specific risks of investing in shares include: the company, or the industry in which it operates, may not perform as well as expected or that there may be adverse changes in a company’s financial position.

Australian smaller company shares

Due to their small size, smaller company shares may grow more rapidly than larger, more mature companies. They are often more flexible and can therefore respond more quickly to changes in market trends, and relative to their larger counterparts.

Active management, including research of the sector by investment managers, may lead to opportunities to add value.

Australian smaller company shares are perceived to be more volatile than larger capitalised stocks. Because they undergo less research than larger stocks, there is greater potential for unexpected negative earnings and this can create sudden downward pressure on share prices.

Smaller companies generally do not have the financial reserves of their larger counterparts and therefore are generally more vulnerable in weaker economic conditions.

Geared Australian share funds

Geared Australian share funds offer the benefits of a convenient, cost effective gearing strategy with potentially higher returns and higher risk.
Investors who may use this style of investment include:
investors looking for the simplicity of a pre?packaged geared investment with relatively low finance costs,
investors who want to borrow to invest in shares but cannot, or do not wish to, use their home as loan security,
investors who want to limit potential losses to the amount invested (i.e. no 'margin calls').

As with all geared equity investments, both positive and negative returns will be magnified. The inclusion of an Australian geared equity fund in a portfolio can provide diversification benefits as well as potentially enhancing long-term returns.

An Australian geared share fund is a higher risk investment than an equivalent ungeared investment, as gearing can magnify both positive and negative returns.
Investors’ returns will be affected by the level of gearing and associated borrowing costs (such as interest rates).
If the gearing limits (see page 3 of Part 2) are exceeded, lenders may require the sale of assets of the Fund to repay borrowings.

In order to improve a fund’s liquidity or prevent a breach of the borrowing arrangements, the underlying fund may at any time suspend the processing of withdrawals.